Tuesday, December 14, 2010

Why Government Debt is REALLY "Bad"

Yesterday's posting on why government debt is a bad idea was supposed to be a "one-shot" deal. We had intended today to post something on how wages tend toward subsistence in a system in which most people are denied access to the means of acquiring and possessing private property. Among other things, there's no "competition" among sources of income, so the wage payer has a virtual monopoly and thus control over wage earners' income.

We'll get to that — eventually — but we received a comment on yesterday's posting that demands a response. Why? Because the comment revealed that people can be reading the postings on this blog, especially on the nature of money and credit, and still remain trapped within the existing paradigm. (We're not talking about Dr. Norman Kurland's posted comment.  We liked that one.  This is one that was sent to us rather than submitted as a posted comment.)

This is a serious problem. The whole point of the Just Third Way is that it takes as a given that the existing paradigm is based on seriously flawed principles. When applied to the design and maintenance of a political or economic system, these flawed principles can have only one result: disaster. This is because the Just Third Way derives from application of the essential precepts of the natural moral law, that is, from human nature itself, reflected from the Creator and discernible by the use of reason. The refusal or inability to base the institutions of society on these precepts within acceptable parameters virtually guarantees failure.

What are the essential precepts of the natural moral law? We find them listed in, e.g., the Universal Declaration of Human Rights and the Declaration of Independence, but perhaps most succinctly in George Mason's draft of the Virginia Declaration of Rights of June 12, 1776: life, liberty (freedom of association/contract), access to the means of acquiring and possessing private property, and the acquisition and development of virtue ("pursuit of happiness and safety"). The last of these, best understood as "becoming more fully human," while most important, is supported by the essential triad of life, liberty, and property.

This is the basic framework of the Just Third Way, a fundamental respect for the dignity of each person. That being the case (and recalling the number of times we've covered this topic in postings on this blog), the comment we received was, well, discouraging:

Since the treasuries of sovereign governments that issue their own currencies are not depository institutions, to speak of such sovereign governments as being in debt is largely meaningless. If government debt is bad, you ought to see just how bad budget surpluses are.

The only way to respond to this dogmatic assertion is to explain again, as briefly as possible, the nature of money — not its function. Because we've explained this so many times before and gone into a great deal of depth on the subject, this is going to come across as a string of dogmatic assertions. If a new reader wants more explanation, there is much more information over to your right under "money and credit," in which there are more than eighty individual postings.

"Money" IS anything that can be used in settlement of a debt. What "money" DOES is serve as the medium of exchange, a standard of value, a unit of measure, and a store of value.

By definition, all money constitutes a contract, and all contracts are money.

"Currency" is a specific form of money, "current money," that may or may not have legal tender status, and may or may not be sanctioned or regulated by the State.

The State's proper role with respect to money is to set the standard of value and enforce contracts when necessary. Anything else interferes with freedom of association (liberty/contract) and undermines the institution of private property where it does not abolish it outright.

A treasury of a sovereign government that issues its own currency is not a "depository institution," but is functioning as a "bank of issue."

A bank of issue only properly emits banknotes and creates demand deposits when the banknotes and demand deposits are backed by the present value of existing and future marketable goods and services or the capital instruments used to produce the future marketable goods and services, in which the issuer (emitter of the banknotes or creator of the demand deposits) has a private property right secured by a bill of exchange or a derivative of a bill of exchange in the form of a draft, a promissory note, or other financial instrument — a "real bill."

An emitter of banknotes or a creator of demand deposits that does not have such a private property right is engaged in theft, that is, is drawing "fictitious (fraudulent) bills." When the emitter/creator is the State, the issuance of banknotes or creation of demand deposits that are not construed as debts secured by future tax collections ("anticipation notes") constitutes effective socialism.

The form of socialism in which the State issues all money backed solely by its "faith and credit" and is not required to make good on the promise(s) conveyed by the currency to holders in due course of the currency is called "chartalism." Lauded by John Maynard Keynes in his Treatise on Money (1930) as the perfect monetary system within and for an absolutist State, chartalism was pioneered by Georg Friedrich Knapp in The State Theory of Money (1924).

Like all socialism, chartalism is based on the belief that private property is illegitimate, and that the State, whether or not it holds actual title, is the real and ultimate owner of everything in the economy. This belief was posited in modern political theory as the "divine right of kings," and articulated in Thomas Hobbes's manual for totalitarian government, Leviathan (1651).

Hobbes was a primary source for Walter Bagehot, whose The English Constitution (1867) and Lombard Street (1873), the latter based on the British Bank Charter Act of 1844, are virtual "bibles" for the structuring of the modern financial system and government monetary and fiscal policy. Bagehot, contradicting A. V. Dicey's emphasis on the "rule of law," presumed rule of the State by a financial elite, a "despotic economic dictatorship" who "often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure." (Quadragesimo Anno, § 105)

This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will. (Ibid., § 106.)
The bottom line is that basing the financial system on the tenets of the British Currency School of finance (that money is arbitrarily defined and re-defined by the State at will, and that freedom of contract is abolished along with private property), is directly contrary to the natural law foundation of the British Banking School of finance, expressed in Say's Law of Markets and applied in the real bills doctrine. The Just Third Way uses the Banking School definition of money, while the commentator is evidently using the Currency School definition. This makes it difficult-to-impossible to respond to such comments without lengthy posts such as this one, for we are clearly not speaking the same language, or analyzing the situation using the same principles.



nail-in-the-wall said...

As you say, Justice without truth and action is neither wise nor useful. And in todays posting DANGEROUS.

Posted both HERE

And I think Martin Weiss and others agree.

Now what?

Join the Coalition to Pass Capital Homesteading by 2012. And tell your Congressmen and neighbor, to get onboard the "Happy" revolution.

Nathan Tankus said...

it is painfully obvious from this post that you understand nothing about chartalism.It has nothing to do with "socialism" or believing that private property is "illegitimate". it is simply a proposed description about how the monetary system works. there are chartal austrians for god-sakes. if you disagree with the description, fine, but it would actually be nice for you to present an actual critique of their positions rather then an uncivil caricature.

Michael D. Greaney said...

Mr. Tankus, I'm afraid you really don't understand private property, money and credit, or banking. If you review the postings on this blog on these subjects, you will see that the Keynesians, Monetarist/Chicago, and Austrian schools of economics all accept as a given the tenets of the British Currency School of finance, of which the principal is that "money" consists exclusively of State-issued or authorized coin, banknotes, and (in most cases) demand deposits.

The Just Third Way is based on the tenets of the British BANKING School of finance, which uses the legal and accounting definition of money: anything that can be used in settlement of a debt. This is best expressed in Say's Law of Markets, and applied in the real bills doctrine.

The Currency School takes for granted that the State has the power to issue money without the essential private property link. Whether the State actually does so is another issue, but the fact remains that the basic principle of the Currency School abolishes private property as a natural right. Since "property" IS a right, this abolishes private property, thereby meeting Marx's definition of socialism: "the abolition of private property."

Chartalism claims that the State has the right to issue money that is unbacked save by the issuer's claim on the general wealth of the economy. Since the State is the issuer in chartalism, this in effect constitutes a claim that the State is (in the words of Henry George) the "universal landlord," which we expand to "universal proprietor" — for only an owner has the right to issue claims against wealth. Chartalism abolishes this right by having the State issue all money, and by taxing it away when the authorities deem there is too much.

Chartalism is therefore a form of socialism, as it is based on the abolition of private property.

Nathan Tankus said...

@Michael d greanly. my whole point is that post-keynesians, institutionalists etc do NOT believe that! chartalists think that all money is a liability to somebody. modern chartalists actually pride themselves on their rigorious use of accounting to understand the modern world! Much post-keynesian energy has been spent expressing the tenets of endogenous money, the operational reality that banks are able to lend money irrespective of how much reserves they have and thus the central bank has little to no control of the money supply.chartalists do not claim that government money is "just" or "right" simply that the tax liability imposed on the private sector gives whatever they accept as payment for taxes value. if i describe a flower as a flower, does that make me flowerist? that seems to be your essential argument that since they talk about government money they must be against private property and are thus socialist. chartalism is in no way based on the abolition of private property. I mean, according to your complete rewriting of the definition of "socialism", all capitalist society has been socialist since government money has been involved.

Anonymous said...

As Nathan said, you don't understand Chartalism, at least the modern incarnation. Modern Chartalists are actually closer to the banking school (see Randy Wray's first book, in which he rejects currency school in favor of banking school). Modern Chartalists understand that there is both privately created money and state money. They've been writing about this for about 15 years now.

Anonymous said...

I should also add that modern chartalists generally reject calls from the far left to abolish non-state money. Again, this has been discussed even within the last year on their blogs.

Michael D. Greaney said...

The three comments above reflect a profound lack of understanding of virtually everything I said — including how my name is spelled! Perhaps today's posting will clear matters up — or not. Frankly, there is massive confusion today over the difference between the Banking School and the Currency School; some authorities even maintain that Keynesian economics is Banking School ... suggesting that they haven't read his 1930 Treatise on Money.

A good guide to determine if someone actually accepts the principles of the Banking School is whether he or she accepts the real bills doctrine — which the Keynesians as well as the Monetarists and Austrians all reject, along with the substance of Say's Law of Markets.

As both Adam Smith and Jean-Baptiste Say explained, Say's Law is at the heart of banking theory, especially as applied in the real bills doctrine.

Nathan Tankus said...

"As both Adam Smith and Jean-Baptiste Say explained, Say's Law is at the heart of banking theory, especially as applied in the real bills doctrine." there is no basis for this statement.The fact that you don't think Post-Keynesians or Chartalists believe that private money exists and is created irrespective of central bank policy suggests thay you have not read any of their monetary theory for the past forty years. say's law is accounting gone mad. just because there must be a purchase for every sale in the past does not mean that the level of potential production in the past was at it's highest point or that there must be available purchasing power in the future do buy all that can be produced. rejecting say's law has nothing to do with thinking that private persons and institutions can or can't create money. It is a fact that the large majority of post-keynesians (and all chartalists i know and have read)think endogenous money theory is largely correct. Keynes changed his opinions substantially from the treatise on money to the general theory and it is argued in many places that there is basis for private money in his thoughts. Ultimately however, this is irrelevant. Post-keynesians think Keynes had a lot of very important insights, but they don't think that what he had to say was the end of economic thought, only an important catalyst;a beginning. the only true way to be a Keynesian is to follow the tenets laid out in this quote of keynes:"when i learn new things, i change my mind. what do you do sir?".

PS: I do sincerely apologize for getting your name wrong.

Michael D. Greaney said...

Heavy sigh.

The name of this blog is "The Just Third Way." In its economic aspects, the Just Third Way is based on the natural law principles embodied in Binary Economics, a development (in part) of Banking School principles. The chief tenet of the Banking School of finance is Say's Law of Markets, especially as applied in the real bills doctrine.

Keynesian, Monetarist/Chicago, and Austrian economics assume as a given that the tenets of the Currency School of finance are valid. This necessarily "forces" adherents of all three schools to reject Say's Law and the real bills doctrine, for the fundamental principles underlying the two systems, Banking and Currency, are diametrically opposed.

Someone who bases his or her economics on the understanding of money and credit found in the Currency School is not going to be able to communicate in any meaningful way with someone who bases his or her economics on the understanding of money and credit found in the Banking School, and vice versa. There may be small points of agreement, but the basic principles are in opposition.

Thus, "proving" that my statements from a Banking School perspective regarding chartalism or anything else are wrong from a Currency School perspective is meaningless. It is analogous to claiming that a horse is wrong because it isn't a cow.

Michael D. Greaney said...

Mr. Tankus submitted another comment. I did not post it as it simply repeated what he has said in previous comments, the gist being that I am wrong, that I don't know what I'm talking about, that Keynesian economics is really Banking School, and that I should read the work of (unspecified) modern chartalists to see how I am mischaracterizing both them and the post-Keynesians.

All of this may, in fact, be true — but it's not up to me to make the case against myself. This blog was established in part to make the case for the Just Third Way. A great deal of research has gone into the postings to support the position of the Just Third Way.

Nevertheless, we welcome debate . . . but it has to be genuine debate, not automatic gainsaying. Until Mr. Tankus is willing to do his own research, present his own arguments and proofs, cite specific sources, and define his terms correctly, neither I nor anyone else associated with this blog is obligated to respond to him.

That being the case, until Mr. Tankus is willing to begin honest debate by answering at least the following questions, thereby agreeing to the playing field and adhering to the general rules of debate, his comments will be deleted:

1. What is private property?

2. What is money?

3. What is Say's Law of Markets?

4. What is the real bills doctrine?

5. What is a bank?

6. What is a bill of exchange?

7. What is savings?

8. What is chartalism?

9. What is socialism?

10. What is a promissory note?